Social Networks

App.net: Like Twitter, but It Costs You

At a time when the world seems to have more social networks than it needs, Dalton Caldwell is not only building a new one, he’s asking people to pay for it. So far, it’s actually working.

In early July, Caldwell, the 32-year-old founder of San Francisco-based Mixed Media Labs, wrote a post on his blog condemning Twitter’s embrace of advertising. Caldwell argued the company seemed to be paying more attention to sponsors than its own users, who are bombarded by unsolicited messages. The post sparked e-mails from industry veterans and fervent online chatter, he says, and convinced him that people would pay to be able to have online conversations without marketing messages. Caldwell says he also received support from programmers, who are frustrated that Twitter keeps changing restrictions on apps it will support. “That made me realize that this resonated with people and you could build a business that appeals to developers,” he says.

Two weeks later, Caldwell and Mixed Media Labs kicked off a fundraising campaign for a subscription-based social network called App.net. The goal was to raise $500,000 in 30 days from supporters who would pledge $50 each to become members. By the end of the financing period, App.net had raised $803,000 from more than 12,000 people. Caldwell says the network now has more than 25,000 paying members and more than $1 million in revenue. A person familiar with App.net’s financials, who was not authorized to speak on the record, says it’s cash flow-positive.

The site looks a lot like an early version of Twitter, a mix of gray and blue with a box at the top of the screen for writing brief posts and a list of messages from people you choose to follow. The service limits posts to 256 characters (you get only 140 per tweet). The tech cognoscenti will know one byte of information can contain any of 256 different letters, numbers, or symbols.

Caldwell wants App.net to be more than a Twitter copycat. He says it will have many new features to distinguish it, such as games and a private group messaging tool. Developers are creating new apps, spurred by a revenue-sharing program introduced in September. On Oct. 1, the site also reduced the cost from $50 a year to $36, or $5 a month. “As we reach economies of scale, I want to lower the price further,” says Caldwell. “Every technology starts off being expensive, whether it’s cell phones or Internet connections.”

Except that social networks have always been free. So the idea of a Twitter clone you have to pay for has not been universally embraced. A parody site called Ihave50dollars.com shows a picture of Caldwell in front of a giant pile of cash. The site urges people to sign up for “a real-time social feed for people who have $50.” Caldwell was only encouraged by the attention, but the critics may have a point. “It started as a geek country club, and as in any country club, its value is driven by its members,” says Brian Solis, an analyst for Altimeter Group. Facebook (FB) and Twitter ads are not obtrusive enough to make an ad-free service a big draw, he says.

The conventional wisdom for building a consumer Internet business is to start by amassing an audience of millions and worry about making money later. The approach has worked for Google (GOOG), Facebook, and Twitter, companies that Caldwell calls “the three stooges.” Says Caldwell: “Monetization is not a feature. Like, ‘Oh yeah, we’ll add that at the end.’ I disagree with that point of view entirely.”

He speaks from experience: After graduating from Stanford University in 2003, he started Imeem, a music-focused social network, with Jan Jannink, a former engineer at Napster, and raised more than $50 million from Sequoia Capital and other venture capitalists. By November 2009, the site had 16 million users, but after paying out music royalties, nothing close to a profit. Myspace, then owned by News Corp. (NWS), acquired the company for a reported $1 million. “I didn’t make any money from Imeem,” Caldwell says. “No one did.”

That wasn’t Caldwell’s only startup miss. In 2010 he founded Mixed Media Labs to design smartphone apps. The company received $5 million from the VC firm Andreessen Horowitz to develop PicPlz, a photo-sharing app that let users decorate their shots with filters. (Bloomberg LP, which owns Bloomberg Businessweek, is an Andreessen Horowitz investor.) Then along came Instagram. PicPlz got clobbered, and Caldwell decided to sell the assets for a small price. Instagram went on to fetch $1 billion from Facebook in an acquisition last April.

Caldwell later butted heads directly with Facebook when he and his dozen employees tried to release a utility that would recommend mobile apps based on what your Facebook friends had installed. Facebook executives, many of whom were already using a beta version of the app, suggested either acquiring or blocking the service, Caldwell wrote in a widely circulated letter to Facebook Chief Executive Officer Mark Zuckerberg. Caldwell says Mixed Media Labs wasn’t confident the project could survive and eventually killed it.

Despite his history, Caldwell isn’t looking to stamp out the giant social networks. “Having my ego systematically destroyed,” he says, “I just reached a point of not caring.” He says he’s realized that he doesn’t need a billion people on his network to declare it a success. “The dogma is that things need to be free. But we don’t need everyone to use it.”